Red-Hot Uber Stock Might Just Prove Its Bull Case in 2020

Recent ride-hailing IPO Uber stock still has a lot to prove to investors

After a brutal 2019, Uber (NYSE: UBER) stock has gotten off to a hot start to 2020. Shares are up 23% in January alone. In the past, I’ve been extremely bearish on Uber, and I still believe it’s a show-me stock that has a lot to prove before it’s a safe long-term investment. However, fourth-quarter earnings are on deck Feb. 6. There is a strong bull case for buying Uber stock if the company can demonstrate it is making strides on its path to profitability.

There are several reasons why Uber is performing so well so far in 2020. One major catalyst is Uber’s decision to divest its Uber Eats business in India in exchange for roughly a 10% stake in Indian food delivery leader Zomato.

What’s important about this deal is not so much the stake in Zomato. Instead, it’s Uber management’s willingness to dump yet another non-core business that was a big money loser. In recent years, Uber has sold off or merged businesses in China, Russia and South Korea when it became clear the business model was not working.

Uber CEO Dara Khosrowshahi has also been pounding Uber’s message in the press hard so far in 2020. In several interviews with CNBC and other media outlets, Khosrowshahi has emphasized that Uber has the most sound business model in the ride-hailing business.

“We are structurally set up more efficiently and more optimally than anyone else to move to profitability,” he said in one interview.

Finally, Uber may be rallying in January because market expectations have finally bottomed. The stench of the overhyped IPO has finally worn off. Investors are finally taking a closer look at the company and its numbers. They see a bull case that could be extremely lucrative.

The Bull Case

Uber’s big January move is indicative of its huge opportunity. But the Uber bull case will still be difficult for the company to achieve. To stay on the bullish path, Uber will need to show progress on several fronts this year. First, it will need to demonstrate that its efforts to pull back driver incentives to reduce losses has not negatively impacted bookings growth. Second, it will need to demonstrate that its $3.1 billion buyout of Middle East ridesharing company Careem is not destined for the scrap heap like some of its other international businesses.

Third, Uber has to make changes with its Eats food delivery business. Eats has been a black hole for profits. Fortunately, the business model may not necessarily be as bad as it seems. In fact, Uber management has said only about 15% of Eats bookings are responsible for roughly half of Eats’ losses. In other words, it seems there may be opportunity for dramatic improvement with only a few minor tweaks.

The more progress Uber makes on the issues above, the more love Uber stock will get from Wall Street analysts, such as Bank of America analyst Justin Post.

“After facing regulatory headwinds and lock up expiration fears throughout its first year as a public company, we think Uber is set up to beat profitability estimates in 2020, which could drive multiple expansion,” Post says.

Proceed With Caution

For all of 2019, I was pounding the table for investors to stay away from Uber and Lyft (NASDAQ: LYFT). The dust has finally settled following the overhyped IPOs. I still think both companies have a lot to prove before they are safe investments.

As a value investor at heart, I can appreciate Uber’s impressive revenue growth numbers. But it needs to show investors that it can eventually turn a consistent profit. It’s difficult to recommend any stock with an unproven business model.

In addition, I have discussed the potential devastating blow that California’s Assembly Bill 5 could have on Uber. Recent polls on the ballot initiative in California have shown the public is deeply divided on the issue of mandatory benefits for independent contractors. Investors must know whether or not AB5 becomes a law or the terms of any potential pre-election compromise. Until then, there is a huge dark cloud hanging over Uber stock.

For now, I see Uber as a show-me stock. At this point, the stock is no longer a clear sell, and it’s still way too early to buy. But Uber’s bull case is compelling enough that investors need to keep a close eye on how 2020 plays out.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.